US Upstream Prepares for Coming LNG Export Wave
Mark Davidson, Washington, Michael Sultan, Washington, Caroline Evans, Houston Paul Sampson, London Editor, Jaime Concha
US Upstream Prepares for Coming LNG Export Wave
Copyright © 2024 Energy Intelligence Group
Published:
Tue, Jan 23, 2024
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The US upstream sector continues to ramp up for the next wave of US LNG export capacity with a series of recent moves designed to connect North American supplies to global gas markets.
While that strategy has typically centered around deals to supply feed gas to existing and planned LNG terminals, it increasingly involves multibillion-dollar mergers of companies with well-positioned upstream assets.
"By combining our companies, we are LNG-ready," Chesapeake Energy CEO Nick Dell’Osso said earlier this month after his company agreed to merge with Southwestern Energy in an $11.5 billion all-stock deal. "We expect to ultimately link up to 20% of our production to international pricing to reprice our molecule to the global markets, which will enhance revenues and reduce pricing volatility.”
Dell’Osso said the deal, which will create the largest US gas producer at 7.4 billion cubic feet per day, “redefines the natural gas producer, forming the first US-based independent that can truly compete on an international scale. The world is short energy, and demand for our products is growing, both in the US and overseas. We will be positioned to deliver more natural gas at a lower cost."
The merger follows Tokyo Gas’ announced plan to acquire Haynesville Shale gas producer Rockcliff Energy for $2.7 billion — another deal aimed at shoring up access to the coming wave of US Gulf Coast LNG terminals and expansions. Analysts at Tudor Pickering Holt predict more than 14 Bcf/d of LNG capacity will make it to market over the next three years.
“Low and volatile gas prices have been a significant hinderance to gas M&A, with just about $6 billion in gas-focused deals transacted in 2023 compared to a massive $186 billion of oil-weighted M&A,” said Andrew Dittmar, senior vice president of Enverus Intelligence Research. But “an LNG-influenced rise in gas prices nears, there should be more enthusiasm from buyers to offer higher prices for assets and companies and drive more gas-weighted M&A.”
And some analysts think this is just the beginning. “I do think this consolidation will continue,” Atlas Consulting CEO Dallas Salazar tells Energy Intelligence, explaining that the current bear market provides incentive for well-financed buyers to snag assets whose value is certain to benefit from the LNG boom.
The strategy mirrors, at least contractually, the integrated model championed by US LNG pioneer Charif Souki, in which LNG exporters owned the molecules from wellhead to liquefaction dock.
Tolling Deals
EQT, which will slide from the largest US gas producer to runner-up, is taking a different approach — although it is not ruling out potential mergers or acquisitions. The Appalachia-focused company is engaging in a series of tolling deals with US LNG projects. The most recent, on Jan. 11, was a heads of agreement for liquefaction services from Texas LNG's proposed 4 million ton per year facility in Brownsville, Texas. The deal would have Texas LNG produce 500,000 tons/yr under a 15-year tolling agreement.
Last summer, EQT signed a preliminary supply deal with Lake Charles LNG for 1 million tons/yr for a 15-year term. Then, in September, EQT signed another preliminary 1 million ton/yr tolling agreement, also for 15 years, with Commonwealth LNG. "Our tolling capacity gives us direct connectivity to end users of natural gas globally, allowing for end-market structuring flexibility and superior downside protection," according to Toby Rice, EQT’s president and CEO, who has been outspoken about the need for US producers to bolster demand via the global LNG market.
But Rice also has a warning: Without new takeaway capacity soon, pipelines in the Northeast and Mid-Atlantic regions will max out and gas that otherwise could provide feed gas to LNG terminals will be trapped. "The fact that we built fewer pipelines last year than in the past 30 years is just remarkable,” he told delegates at Hart Energy's recent DUG Appalachia conference, noting that since 2010 gas demand has risen 56%, while pipeline capacity has grown only 25%. Given the impending surge of new demand from LNG and other sources, “that is not sustainable,” Rice said.
Traders Step Up
Meanwhile, large global traders have advanced in their traditional role of connecting buyers and sellers, bringing that expertise to North American markets. Leading commodities trader Trafigura, in another January deal, expanded its North American LNG portfolio by signing a seven-year offtake contract with Canada’s largest gas producer Tourmaline Oil Corp., which will start in early 2027.
The contract, the first between the two companies, will see Trafigura buy 500,000 tons of LNG from Tourmaline that will be priced against the Japan Korea Marker, the de facto pricing benchmark used for spot LNG shipments to the Far East.
The deal follows a deal that rival trader Gunvor did with Delfin Midstream back in November in which Delfin agreed to supply between 500,000 million tons/yr and 1 million tons/yr to Gunvor on a f.o.b. basis for a term of 15 years.
Cheniere as Facilitator
On the downstream front, meanwhile, leading US LNG exporter Cheniere is using its now hefty revenue to facilitate connections between the US upstream and world gas markets.
Cheniere's deal with Austria's OMV earlier this month price-linked US LNG to the Dutch TTF index, Europe’s benchmark gas hub, rather than Henry Hub. However, the deal is considered to be an offset to an earlier integrated production marketing (IPM) gas supply agreement with Canadian producer ARC Resources, which will receive a TTF-linked price for the 140,000 million Btu per day (3.69 million cubic meters per day) of gas it supplies to Sabine Pass.
Cheniere has long emphasized the importance of IPM agreements with gas suppliers as the company builds its portfolio of liquefaction projects.